Website-based peer-to-peer lending is new to New Zealand but promises borrowers and lenders a better deal than that offered by the banks. Overseas, people are piling in.
But there are risks for lenders. What is on offer is an investment, not a savings product like a bank term deposit.
On the upside, lenders could earn nearer 12 than the current five per cent interest on their money.
And for those borrowers who can’t easily lend from banks – because they have an uncertain income or poor credit history – there is the promise of a quick, five-minute online application plus much lower rates than those offered by high street lenders, a number of whom are definitely loan sharks. Some charge up to 10 per cent a week – a whopping 520 per cent a year. Makes credit card interest of around 20 per cent sound like a giveaway.
New Zealand’s first licensed peer-to-peer lender Harmoney is just a few months old but already sounds busy. It expects a lot of loans to be for expensive life events like having a baby or getting married, or buying a car or renovating.
But what exactly is peer-to-peer lending? Often shortened to P2P lending, it is a website-based financial match-making service that has been likened to a dating service. It brings together those wanting to lend money with those who want borrow it (their peers) but without a bank standing in the middle.
Those running the P2P website do all the money managing. They take a fee, but the upside is the appeal – for both borrowers and lenders – of often much better interest rates than the banks’ rates. P2P lenders can offer better rates because they are online only so don’t have the banks’ large overheads.
Although such lending isn’t risk-free, these services have been around for five years overseas and people have been flocking to them. The main risk is lenders can lose their money if a borrower defaults.
Overseas P2P lenders deal with this by spreading loans across several lenders to minimise risk. They also set up default funds. And lenders with low default rates often advertise this on their website.
So far, New Zealand has only one P2P lender, Harmoney, which was recently licensed by the finance watchdog, the FMA (Financial Markets Authority). But there are others waiting in the wings.
This licence provides some protection as a P2P lender which misbehaves can lose its licence. P2P lenders must also be members of a dispute resolution service that its lenders can go to, at no cost, if things do go wrong.
Peer-to-peer lending is the sister of crowd funding – both seek money from ‘the crowd’. The FMA has also just started licensing the new form of crowd-funding called equity crowd-funding that allows companies to sell shares via crowd-funders’ websites. There are presently two of these share-selling website services – PledgeMe and Snowball Effect.
This is all new and exciting but risky territory, and definitely worth learning more about. The banks are interested themselves, and they wouldn’t be if it were a dud idea. For instance, former BNZ director Rob Campbell is chairman of Harmoney. And, in the UK, high street bank Santander recently started referring customers to a P2P lender, and has gone into partnership with one, Funding Circle, as a way of funding small business loans. It sees it as a good way of getting people to invest in entrepreneurial businesses.
Despite the risk, P2P lending and its sister, equity crowd-funding, are here to stay, which is good news for women in business or those wanting to start one – women’s success rate raising money this way is high.
Alternatively, they may just make it easier to get a cheap loan for a car or to buy the baby-gear a new baby needs.
© Johanna Bennett, 2014
Johanna Bennett is a financial and technology journalist who thinks women need to know more about the big picture when it comes to money. Her blog, Kate & Whio, is intended to help and to educate, but the information contained in it should not be taken as specific financial advice. You are responsible for your own money decisions.